A stock moving up or down on low volume is usually a warning sign: proceed with caution. It may mean a move you cannot trust: market uncertainty, manipulation or a thinly traded, volatile stock that is generally riskier to trade than high-volume stocks.

Interpreting Price and Volume Action

Price action reflects investor sentiment. If a stock is rising, investors are eager to buy; if it is falling, investors are eager to sell. But for a move to be valid, the stock price action must be confirmed by volume. As technicians say, volume goes with the trend. Volume shows how much conviction investors have in a trend. When you multiply the number of shares traded by the current stock price, you get the total dollar amount that investors are willing to put at risk. Low volume means few investors are putting little money at risk. You cannot trust such price moves, as they are fickle and can easily reverse.

Indecision or Uncertainty

When things are unclear many investors tend to stay on the sidelines and stop trading, so the volume dries up. But if some traders feel compelled to act out of boredom or to entice others to act, their trades can push prices up or down in a slow market. Other traders may act prematurely, hoping to be ahead of the crowd. But if others do not follow those moves, stocks can quickly return to their previous levels.

Manipulation

It is easier to manipulate a stock when its volume is low. All a manipulator needs to do is execute a few carefully timed trades to create the illusion that a stock is moving so he can get others to buy or sell. The goal is to raise the price if he wants to sell and to lower the price if he wants to buy. If you are suckered in by such a move, your position can quickly turn into a loss as the stock you just bought suddenly reverses course on increased volume.

Thinly Traded Stocks

Some stocks simply trade on low volume. The risk of trading a low-volume stock, besides the above reasons, is that behind each stock there is a professional trader who trades it day in and day out and who will try to profit from your order by moving the price away from you so you end up overpaying when you buy or getting less when you sell.

About the Author

Based in San Diego, Slav Fedorov started writing for online publications in 2007, specializing in stock trading. He has worked in financial services for more than 20 years, serving as a banker, financial planner and stockbroker. Now working as a professional trader, Fedorov is also the founder of a stock-picking company.

At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors. This dedication to giving investors a trading advantage led to the creation of our proven Zacks Rank stock-rating system. Since 1986 it has nearly tripled the S&P 500 with an average gain of +26% per year. These returns cover a period from 1986-2011 and were examined and attested by Baker Tilly, an independent accounting firm.

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